Notes
to Unaudited Consolidated Condensed Financial Statements
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Marathon
Patent Group, Inc.’s (the “Company”) business is to acquire patents and patent rights and to monetize the value
of those assets to generate revenue and profit for the Company. We acquire patents and patent rights from their owners, who range
from individual inventors to Fortune 500 companies. Part of our acquisition strategy is to acquire or invest in patents and patent
rights that cover a wide-range of subject matter, which allows us to achieve the benefits of a growing diversified portfolio of
assets. Generally, the patents and patent rights that we acquire are characterized by having large identifiable companies who
are or have been using technology that infringes our patents and patent rights. We generally monetize our portfolio of patents
and patent rights by entering into license discussions, and if that is unsuccessful, initiating enforcement activities against
any infringing parties with the objective of entering into a standard form of comprehensive settlement and license agreement that
may include the granting of non-exclusive retroactive and future rights to use the patented technology, a covenant not to sue,
a release of the party from certain claims, the dismissal of any pending litigation and other terms that are appropriate in the
circumstances. Our strategy has been developed with the expectation that it will result in a long-term, diversified revenue stream
for the Company.
The
Company was incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011,
we changed our name to American Strategic Minerals Corporation and were engaged in the business of exploration and potential development
of uranium and vanadium minerals business. In June 2012, we discontinued our minerals business and began to invest in real estate
properties in Southern California. In October 2012, we discontinued our real estate business when our CEO joined the firm and
we commenced our current business, at which time the Company’s name was changed to Marathon Patent Group, Inc.
On
October 1, 2012, the shareholders holding a majority of the Company’s voting capital had voted and authorized the Company
to change the name of the Company to Marathon Patent Group, Inc. (the “Name Change”). The Board of Directors approved
the Name Change on October 1, 2012. The Board of Directors determined the name “Marathon Patent Group, Inc.” better
reflected the long-term strategy in exploring other opportunities and the identity of the Company going forward. On February 15,
2013, the Company filed the Certificate of Amendment with the Secretary of State of the State of Nevada in order to effectuate
the Name Change.
On
July 18, 2017, shareholders of record holding a majority of the outstanding voting capital of the Company approved a reverse stock
split of the Company’s issued and outstanding common stock by a ratio of not less than one-for-four and not more than one-for-twenty-five,
with such ratio to be determined by the Board of Directors, in its sole discretion. On October 25, 2017, the reverse stock split
ratio of one (1) for four (4) basis was approved by the Board of Directors. On October 30, 2017, the Company filed a certificate
of amendment to its Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada in order
to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.0001 per share on
a one (1) for four (4) basis.
On
September 6, 2017, the Board of Directors approved and adopted, subject to shareholder approval on or prior to September 6, 2018,
the Company’s 2017 Equity Incentive Plan. The Company’s 2017 Equity Incentive Plan was approved by the shareholders
of the Company at a special meeting held on September 29, 2017.
All
share and per share values for all periods presented in the accompanying consolidated financial statements have been retroactively
adjusted to reflect the Reverse Split.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated condensed financial statements have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have
been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly
the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that
these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes
thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made by management include, but are not limited to, estimating the useful lives of patent assets,
the assumptions used to calculate fair value of warrants and options granted, goodwill impairment, realization of long-lived assets,
deferred income taxes, unrealized tax positions and business combination accounting.
Cash
The
Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when
purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution that is
insured by the Federal Deposit Insurance Corporation and restricted cash, held in escrow pursuant to the terms of the Unit Purchase
Agreement entered into on August 14, 2017, with another financial institution that is also insured by the Federal Deposit Insurance
Corporation. The Company’s accounts held at this institution, up to a limit of $250,000, are insured by the Federal Deposit
Insurance Corporation (“FDIC”). As of September 30, 2017, the Company had bank balances exceeding the FDIC insurance
limit. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the
rating of the financial institution in which it holds deposits.
Accounts
Receivable
The
Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses
in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance
is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection
have been exhausted and the potential for recovery is considered remote. At each of September 30, 2017 and December 31, 2016,
the Company had recorded an allowance for bad debts in the amount of $387,976 and $387,976, respectively. Accounts receivable,
net at September 30, 2017 and December 31, 2016, amounted to $123,630 and $95,069, respectively.
Concentration
of Revenue and Geographic Area
Revenue
from the Company’s patent enforcement activities is considered United States revenue as any payments for licenses included
in that revenue are for United States operations irrespective of the location of the licensee’s or licensee’s parent
home domicile.
The
Company had $0 in revenues from newly issued patent licenses for both the three months ended September 30, 2017 and the three
months ended September 30, 2016. The revenue for the three months ended September 30, 2017 is attributable to a non-enforcement
technology access license for one of the Company’s subsidiaries and running royalties from the Company’s Medtech portfolio
and for the three months ended September 30, 2016, the revenue is attributable to running royalties from the Company’s Medtech
portfolio.
At
the current time, we define customers as firms that obtain licenses to the Company’s patents, either prior to or during
enforcement litigation. These firms generally enter into non-recurring, non-exclusive, non-assignable license agreements with
the Company, and these customers do not generally engage in ongoing, recurring business activity with the Company. The Company
has historically had a small number of customers enter into such agreements, resulting in higher levels of revenue concentration.
Revenue
Recognition
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 605, “Revenue
Recognition”. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been
substantially performed, (iii) amounts are fixed or determinable and (iv) collectability of amounts is reasonably assured. In
general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain
intellectual property rights for patented technologies owned or controlled by the Company.
These
rights typically include some combination of the following: (i) the grant of a non-exclusive, perpetual license to use patented
technologies owned or controlled by the Company, (ii) a covenant-not-to-sue, (iii) the dismissal of any pending litigation.
The
intellectual property rights granted typically are perpetual in nature. Pursuant to the terms of these agreements, the Company
has no further obligation with respect to the grant of the non-exclusive licenses, covenants-not-to-sue, releases, and other deliverables,
including no express or implied obligation on the Company’s part to maintain or upgrade the technology, or provide future
support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other
significant deliverables upon execution of the agreement. As such, the earnings process is complete and revenue is recognized
upon the execution of the agreement, when collectability is reasonably assured, and when all other revenue recognition criteria
have been met.
The
Company also considers the revenue generated from its settlement and licensing agreements as one unit of accounting under ASC
605-25, “Multiple-Element Arrangements” as the delivered items do not have value to customers on a standalone basis,
there are no undelivered elements and there is no general right of return relative to the license. Under ASC 605-25, the appropriate
recognition of revenue is determined for the combined deliverables as a single unit of accounting and revenue is recognized upon
delivery of the final elements, including the license for past and future use and the release.
Also,
since the settlement element and license element for past and future use are the Company’s major central business, the Company
presents these two elements as one revenue category in its statement of operations. The Company does not expect to provide licenses
that do not provide some form of settlement or release. There was no revenue from newly issued patent licenses for the three months
ended September 30, 2017 and September 30, 2016, respectively.
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets of $108,878 and $202,067 at September 30, 2017 and December 31, 2016, respectively, consist
primarily of costs paid for future services, which will occur within a year. Prepaid expenses include prepayments in cash and
equity instruments for public relation services, business advisory, consulting, and prepaid insurance, which are being amortized
over the terms of their respective agreements.
Bonds
Posted with Courts
Under
certain circumstances related to litigations in Germany, the Company is either required to or may decide to enter a bond with
the courts. As of September 30, 2017 and December 31, 2016, the Company had no outstanding bonds posted with the German courts.
Related
Party Transactions
Parties
are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its
management, members of the immediate families of principal owners of the Company and its management and other parties with which
the Company may deal if one party controls or can significantly influence the management or operating policies of the other to
an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses
all related party transactions.
On
May 13, 2013, we entered into a nine-year advisory services agreement (the “Advisory Services Agreement”) with IP
Navigation Group, LLC (“IP Nav”), of which Erich Spangenberg is founder and former Chief Executive Officer. Mr. Spangenberg
is an affiliate of the Company. The terms of the Advisory Services Agreement provide that, in consideration for its services as
intellectual property licensing agent, the Company will pay to IP Navigation Group, LLC between 10% and 20% of the gross proceeds
of certain licensing campaigns in which IP Navigation Group, LLC acts as intellectual property licensing agent.
On
November 18, 2013, we entered into a consulting agreement with Jeff Feinberg (“Feinberg Agreement”), pursuant to which
we agreed to grant Mr. Feinberg 25,000 shares of our restricted Common Stock, 50% of which shall vest on the one-year anniversary
of the Feinberg Agreement and the remaining 50% of which shall vest on the second-year anniversary of the Feinberg Agreement.
Mr. Feinberg is the trustee of The Feinberg Family Trust and holds voting and dispositive power over shares held by The Feinberg
Family Trust, which is a 10% beneficial owner of our Common Stock.
On
May 2, 2014, the Company completed the acquisition of certain ownership rights (the “Acquired Intellectual Property”)
from TechDev, Granicus and SFF pursuant to the terms of three purchase agreements between: (i) the Company, TechDev, SFF and DA
Acquisition LLC, a newly formed Texas limited liability company and wholly-owned subsidiary of the Company; (ii) the Company,
Granicus, SFF and IP Liquidity Ventures Acquisition LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary
of the Company; and (iii) the Company, TechDev, SFF and Sarif Biomedical Acquisition LLC, a newly formed Delaware limited liability
company and wholly-owned subsidiary of the Company. TechDev, SFF and Granicus are owned or controlled by Erich Spangenberg or
family members or associates.
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Pursuant
to the DA Agreement, the Company acquired 100% of the limited liability company membership interests of Dynamic Advances,
LLC, a Texas limited liability company, in consideration for: (i) two cash payments of $2,375,000, one payment due at closing
and the other payment was due on or before June 30, 2014, with such second payment being subject to increase to $2,850,000
if not made on or before June 30, 2014; and (ii) 97,750 shares of the Company’s Series B Convertible Preferred Stock.
The remaining cash payment was made on April 1, 2015 and is fully paid. Under the terms of the DA Agreement, TechDev and SFF
are entitled to possible future payments for a maximum consideration of $250,000,000 pursuant to the Pay Proceeds Agreement
described below.
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Pursuant
to the IP Liquidity Agreement, the Company acquired 100% of the limited liability company membership interests of IP Liquidity
Ventures, LLC, a Delaware limited liability company, in consideration for: (i) two cash payments of $2,375,000, one payment
due at closing and the other payment was due on or before June 30, 2014, with such second payment being subject to increase
to $2,850,000 if not made on or before June 30, 2014; and (ii) 97,750 shares of the Company’s Series B Convertible Preferred
Stock. The remaining cash payment was made on April 1, 2015 and is fully paid. Under the terms of the IP Liquidity Agreement,
Granicus and SFF are entitled to possible future payments for a maximum consideration of $250,000,000 pursuant to the Pay
Proceeds Agreement described below.
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Pursuant
to the Sarif Agreement, the Company acquired 100% of the limited liability company membership interests of Sarif Biomedical,
LLC, a Delaware limited liability company, in consideration for two cash payments of $250,000, one payment due at closing
and the other payment was due on or before June 30, 2014, with such second payment being subject to increase to $300,000 if
not made on or before June 30, 2014. The remaining cash payment was made on February 24, 2015 and is fully paid. Under the
terms of the Sarif Agreement, TechDev and SFF are entitled to possible future payments for a maximum consideration of $250,000,000
pursuant to the Pay Proceeds Agreement described below.
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Pursuant
to the Pay Proceeds Agreement, the Company may pay the sellers a percentage of the net recoveries (gross revenues minus certain
defined expenses) that the Company makes with respect to the assets held by the entities that the Company acquired pursuant
to the DA Agreement, the IP Liquidity Agreement and the Sarif Agreement. Under the terms of the Pay Proceeds Agreement, as
amended in 2016, if the Company recovers $10,000,000 or less with regard to the IP Assets, then nothing is due to the sellers;
if the Company recovers between $13,000,000 and $40,000,000 with regard to the IP Assets, then the Company shall pay 40% of
the cumulative gross proceeds of such recoveries to the sellers; and if the Company recovers over $40,000,000 with regard
to the IP Assets, the Company shall pay 50% of the cumulative gross proceeds of such recoveries to the sellers. Pursuant to
the amendment to the Pay Proceeds Agreement, the Company paid TechDev, Granicus and SFF $2.4 million. In no event will the
total payments made by the Company under the Pay Proceeds Agreement exceed $250,000,000.
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On
May 2, 2014, we entered into an opportunity agreement (the “Marathon Opportunity Agreement”) with Erich Spangenberg,
who is an affiliate of the Company. The terms of the Marathon Opportunity Agreement provide that we have ten business days after
receiving notice from Mr. Spangenberg to provide up to 50% of the funding for certain opportunities relating to the licensing,
intellectual property acquisitions and/or intellectual property enforcement actions in which Mr. Spangenberg, IP Nav or any entity
controlled by Mr. Spangenberg, other than: (i) IP Nav or any of its affiliates, and (ii) Medtech Development, LLC or any of its
affiliates.
On
June 17, 2014, Selene Communication Technologies Acquisition LLC (“Acquisition LLC”), a Delaware limited liability
company and newly formed wholly-owned subsidiary of the Company, entered into a merger agreement with Selene Communication Technologies,
LLC (“Selene”). Selene owned a patent portfolio consisting of three United States patents in the field of search and
network intrusion that relate to tools for intelligent searches applied to data management systems as well as global information
networks such as the internet. IP Nav provided patent monetization and support services under an existing agreement with Selene
prior to the return of the patents to Stanford Research Institute (“SRI”), the original owners of the patents.
On
August 29, 2014, the Company entered into a patent purchase agreement to acquire a portfolio of patents from Clouding IP, LLC
for an aggregate purchase price of $2.4 million, of which $1.4 million was paid in cash and $1.0 million was paid in the form
of a promissory note issued by the Company that matured on October 31, 2014 and was fully paid prior to the maturation date. The
Company also issued 6,250 shares of its restricted common stock in connection with the acquisition. Clouding IP, LLC is also entitled
to certain possible future cash payments. Clouding IP LLC is owned or controlled by Erich Spangenberg or family members or associates.
On
October 10, 2014, the Company entered into an interest sale agreement with MedTech Development, LLC (“MedTech”) to
acquire from MedTech 100% of the limited liability membership interests of OrthoPhoenix and TLIF as well as 100% of the shares
of MedTech GmbH. In connection with the transaction, the Company is obligated to pay to MedTech $1 million at closing and $1 million
on each of the following nine (9) month anniversary dates of the closing. On July 16, 2015, the Company entered into a forbearance
agreement (the “Agreement”) with MedTech Development, the holder of a Promissory Note issued by the Company, dated
October 10, 2014. Pursuant to the Agreement, the term of the Note was extended to October 1, 2015 and the Note began accruing
interest starting from May 13, 2015. In addition, the Company agreed to make certain mandatory prepayments under certain circumstances
and issue to MedTech Development 500,000 shares of restricted common stock of the Company. In accordance with ASC 470-50, the
Company recorded this agreement as debt extinguishment and $654,000 was recorded as loss on debt extinguishment during the year
ended September 30, 2015. On October 23, 2015, the Company entered into Amendment No. 1 to the Forbearance Agreement (the “Amendment”)
entered into with MedTech Development on July 16, 2015. Pursuant to the Amendment, the due date of the Promissory Note was extended
to October 23, 2016 in return for which the Company made a payment of $100,000 on October 23, 2015 and modified the terms under
which the Company agreed to make mandatory prepayments under certain circumstances. The acquired subsidiaries are also obligated
to make certain additional payments to MedTech from recoveries following the receipt by the acquired subsidiaries of 200% of the
purchase payments, plus recovery of out of pocket expenses in connection with patent claims. The participation payments may be
paid, at the election of the Company, in common stock of Marathon at the market price on the date of issuance. In connection with
the transaction, the Company entered into a promissory note, common interest agreement and in the event of issuance of common
stock to MedTech, will enter into a lockup and registration rights agreement. Approximately forty-five percent (45%) of MedTech
is owned or controlled by Erich Spangenberg or family members or associates.
On
October 1, 2016, one of the Company’s subsidiaries, PG Technologies S.a.r.l. entered into an advisory services agreement
with Granicus IP, LLC, an entity owned or controlled by one of the Company’s employees, whereby Granicus receives a percentage
of pre-tax return from PG Technologies after certain revenue thresholds have been met.
During
2016, certain officers and directors of the Company received restricted common stock in the Company’s 3D Nanocolor Corp.
(“3D Nano”) subsidiary.
At
December 31, 2016, ‘‘Other noncurrent assets’’ in the Balance Sheets consists of a note receivable from
an entity controlled by one of the Company’s employees that is uncollateralized. The note receivable does not carry interest
and is repayable to the Company at the earlier of March 31, 2022 or based on certain milestones. The note receivable balance has
been classified as current assets because the Company believes that it will be collected within one year from the Balance Sheet
dates.
On
September 29, 2017, the Company entered into an Irrevocable Stock Power whereby the Company sold the shares it owns in
the Company’s subsidiary, 3D Nano to Doug Croxall, the Company’s Chief Executive Officer with such assignment including
the assumption of all of 3D Nano’s liabilities.
The
Company engaged a third party to value the assignment, the results of which were that the valuation and assignment were deemed
to be at fair value.
Fair
Value of Financial Instruments
The
Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date,
essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy
are:
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Level
1:
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Observable
inputs such as quoted market prices in active markets for identical assets or liabilities
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Level
2:
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Observable
market-based inputs or unobservable inputs that are corroborated by market data
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Level
3:
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Unobservable
inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
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The
carrying amounts reported in the consolidated condensed balance sheet for cash, accounts receivable, bonds posted with courts,
accounts payable, and accrued expenses, approximate their estimated fair market value based on the short-term maturity of these
instruments. The carrying value of notes payable and other long-term liabilities approximates fair value as the related interest
rates approximate rates currently available to the Company.
Clouding
IP earn out liability was determined as a Level 3 liability, which requires an assessment of fair value at each period end by
using discounted cash flow as a valuation technique using unobservable inputs, such as revenue and expenses forecasts, timing
of proceeds, and discount rate. Based on reassessment of fair value as of September 30, 2017, the Company determined that there
was a reduction in the Clouding IP earn out liability during the three and nine months ended September 30, 2017 in the amounts
of $754,321and $754,321, respectively and a reduction in the carrying value of the Clouding IP intangible assets during the three
and nine months ended September 30, 2017 in the amounts of $723,218 and $723,218, respectively.
The
Company determined that the Warrants issued pursuant to the Unit Purchase Agreement should be treated as a Level 2 liability,
which determine the value based on observable market-based inputs. in this instance, the Warrants were valued using a Monte-Carlo
simulation utilizing market-based inputs for volatility and risk-free rate of interest, which resulted in the Warrants issued
pursuant to the August 31, 2017 close being fair valued at $0.0364 per share and the Warrants issued pursuant to the September
29, 2017 close being fair valued at $0.0877 per share.
Accounting
for Acquisitions
In
the normal course of its business, the Company makes acquisitions of patent assets and may also make acquisitions of businesses.
With respect to each such transaction, the Company evaluates facts of the transaction and follows the guidelines prescribed in
accordance with ASC 805 — Business Combinations to determine the proper accounting treatment for each such transaction and
then records the transaction in accordance with the conclusions reached in such analysis.The Company performs such analysis with
respect to each material acquisition within the consolidated group of entities.
Income
Taxes
The
Company accounts for income taxes pursuant to the provision of ASC 740-10, “Accounting for Income Taxes” which requires,
among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred
tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The
Company follows the provision of the ASC 740-10 related to Accounting for Uncertain Income Tax Position. When tax returns are
filed, it is more likely than not that some positions taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements
in the period during which, based on all available evidence, management believes it is most likely that not that the position
will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are
not offset or aggregated with other positions.
Tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more
than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain
tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing
authorities upon examination. The Company believes its tax positions will more likely than not be upheld upon examination. As
such, the Company has not recorded a liability for uncertain tax benefits.
The
federal and state income tax returns of the Company are subject to examination by the Internal Revenue Service and state taxing
authorities, generally for three years after they were filed. The Company is in the process of filing the 2016 tax returns. After
review of the prior year financial statements and the results of operations through December 31, 2016, the Company has recorded
a full valuation allowance on its deferred tax asset.
Basic
and Diluted Net Loss per Share
Net
loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per
share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares
outstanding, as they would be anti-dilutive. The Company has options to purchase 613,195 shares of Common Stock, warrants to purchase
7,487,894 shares of Common Stock, Convertible Notes convertible into up to 13,750,000 shares of Common Stock and shares of Series
B Convertible Preferred Stock convertible into 195,501 shares of Common Stock outstanding at September 30, 2017, which were excluded
from the computation of diluted shares outstanding, as they would have had an anti-dilutive impact on the Company’s net
loss.
The
following table sets forth the computation of basic and diluted loss per share:
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For
the Three Months Ended
September
30, 2017
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For
the Three Months Ended
September
30, 2016
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For
the Nine Months
Ended
September
30, 2017
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For
the Nine Months
Ended
September
30, 2016
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Net
income (loss) attributable to Common shareholders
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$
|
(6,677,485
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)
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$
|
(6,274,410
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)
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$
|
(12,484,924
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)
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$
|
(2,261,542
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)
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Denominator
|
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|
|
|
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Weighted
average common shares – Basic and Diluted
|
|
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6,270,299
|
|
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3,761,786
|
|
|
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5,564,465
|
|
|
|
3,736,213
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|
|
|
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|
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Earnings
(loss) per common share:
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Earnings
(loss) – Basic and Diluted
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$
|
(1.06
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)
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$
|
(1.67
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)
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$
|
(2.24
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)
|
|
$
|
(0.60
|
)
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Intangible
Assets - Patents
Intangible
assets include patents purchased and patents acquired in lieu of cash in licensing transactions. The patents purchased are recorded
based on the cost to acquire them and patents acquired in lieu of cash are recorded at their fair market value. The costs of these
assets are amortized over their remaining useful lives. Useful lives of intangible assets are periodically evaluated for reasonableness
and the assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may no
longer be recoverable. The Company recorded impairment charges to its intangible assets during the three and nine months ended
September 30, 2017 in the amount of $723,218 and $723,218, respectively, compared to impairment charges associated with the end
of life of a number of the Company’s portfolios during the three and nine months ended September 30, 2016 in the amounts
of $5,531,383 and $6,525,273, respectively.
Goodwill
Goodwill
is tested for impairment at the reporting unit level at least annually in accordance with ASC 350, and between annual tests if
an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
value.
When
conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is
more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not
that goodwill is impaired, the Company then applies a two-step impairment test. The two-step impairment test first compares the
fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the reporting unit exceeds
its carrying value, goodwill is not impaired. If the carrying value of the reporting unit exceeds its fair value, the Company
determines the implied fair value of the reporting unit’s goodwill and if the carrying value of the reporting unit’s
goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded in the consolidated condensed
statement of operations. The Company performs the annual testing for impairment of goodwill at the reporting unit level during
the quarter ended September 30.
For
the three and nine months ended September 30, 2017 the Company recorded no impairment charge to its goodwill and for the three
and nine months ended September 30, 2016, the Company recorded an impairment charge to its goodwill in the amount of $0 and $83,000,
respectively.
Other
Intangible Assets
In
accordance with ASC 350-30, “Intangibles - Goodwill and Others”, the Company assesses the impairment of identifiable
intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company
considers to be important which could trigger an impairment review include the following: (1) significant underperformance relative
to expected historical or projected future operating results; (2) significant changes in the manner of use of the acquired assets
or the strategy for the overall business; and (3) significant negative industry or economic trends.
When
the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of
the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows,
the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method
using a discount rate determined by management to be commensurate with the risk inherent in the current business model.
For
the three and nine months ended September 30, 2017 and September 30, 2016, the Company recorded no impairment charge to its other
intangible assets.
Impairment
of Long-lived Assets
The
Company accounts for the impairment or disposal of long-lived assets according to the ASC 360 “Property, Plant and Equipment”.
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of long-lived
assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to the estimated future net undiscounted cash flows expected to be generated by the asset. When necessary, impaired
assets are written down to estimated fair value based on the best information available. Estimated fair value is generally based
on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary
to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the
asset.
The
Company did not record any impairment charges on its long-lived assets during the three and nine months ended September 30, 2017
and September 30, 2016.
Stock-based
Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity
instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively,
the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for
an award based on the grant-date fair value of the award. As stock-based compensation expense is recognized based on awards expected
to vest, forfeitures are also estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
For
the three and nine months ended September 30, 2017, the expected forfeiture rate was 12.75%, which resulted in an expense of $60,115
and $108,748, for the three and nine months ended September 30, 2017, respectively, recognized in the Company’s compensation
expenses. For the three and nine months ended September 30, 2016, the expected forfeiture rate was 11.03%, which resulted in an
expense of $9,570 and $36,832 for the three and nine months ended September 30, 2016, respectively, recognized in the Company’s
compensation expenses. The Company will continue to re-assess the impact of forfeitures if actual forfeitures increase in future
quarters.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based
on the fair value of the award at the reporting date.
Liquidity
and Capital Resources
At
September 30, 2017, we had approximately $0.1 million in unrestricted cash and cash equivalents, $3.9 million in restricted cash
and an unrestricted working capital deficit of approximately $20.3 million.
Based
on the Company’s current revenue and profit projections, management is uncertain that the Company’s existing cash
and accounts receivables will be sufficient to fund its operations through at least the next twelve months from the issuance date
of the financial statements, raising substantial doubt regarding the Company’s ability to continue operating as a going
concern. If we do not meet our revenue and profit projections or the business climate turns negative, then we will need to:
|
●
|
raise
additional funds to support the Company’s operations; provided, however, there is no assurance that the Company will
be able to raise such additional funds on acceptable terms, if at all. If the Company raises additional funds by issuing securities,
existing stockholders may be diluted; and
|
|
|
|
|
●
|
review
strategic alternatives.
|
If
adequate funds are not available, we may be required to curtail our operations or other business activities or obtain funds through
arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.
The accompanying consolidated condensed financial statements have been prepared assuming the Company will continue to operate
as a going concern, which contemplates the realization of assets and settlements of liabilities in the normal course of business,
and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue
as a going concern
Recent
Accounting Pronouncements
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480)
Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with
down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result
in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates
cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire instrument or conversion option. For public business entities, the
amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018 with early adoption permitted.
In
May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
.
This ASU provides clarity about which changes to the terms or conditions of a share-based payment award require the application
of modification accounting. Specifically, ASU 2017-09 clarifies that changes to the terms or conditions of an award should be
accounted for as a modification unless all of the following are met: 1) the fair value of the modified award is the same as the
fair value of the original award immediately before the original award is modified, 2) the vesting conditions of the modified
award are the same as the vesting conditions of the original award immediately before the original award is modified and 3) the
classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the
original award immediately before the original award is modified. ASU 2017-09 is effective for annual reporting periods beginning
after December 15, 2017 and early adoption is permitted. The Company does not expect the adoption of ASU 2017-09 to significantly
impact its accounting for share-based payment awards, as changes to awards’ terms and conditions subsequent to the grant
date are unusual and infrequent in nature.
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-04
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”).
This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the
amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting
unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual
period beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017.
In
January 2017, the FASB issued ASU 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU
2017-01”), which clarifies the definition of a business and assists entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair
value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent
a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and
a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows
the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition.
This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.
In
November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No.
2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
,
which addresses classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires
an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows
to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. The ASU
does not define restricted cash or restricted cash equivalents, but an entity will need to disclose the nature of the restrictions.
The ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15,
2017. Early adoption is permitted, including adoption in an interim period.
In
October 2016, the FASB issued ASU 2016-16
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”), which eliminates the exception in existing guidance which defers the recognition of the tax effects
of intra-entity asset transfers other than inventory until the transferred asset is sold to a third party. Rather, the amended
guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory
when the transfer occurs. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early
adoption permitted as of the beginning of an annual reporting period. The Company is currently assessing the impact of this guidance
on its consolidated condensed financial statements.
In
August 2016, the FASB issued ASU 2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments
(“ASU 2016-15”). The standard is intended to eliminate diversity in practice in how certain cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for fiscal years
beginning after December 15, 2017. Early adoption is permitted for all entities. The Company is currently evaluating the impact
of this guidance on its consolidated condensed financial statements.
In
May 2014, the FASB Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers, as a new Topic, (ASC) Topic 606. The new revenue recognition standard provides
a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard
for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original
effective date. This ASU must be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the
date of adoption. We are considering the alternatives of adoption of this ASU and we are conducting our review of the likely impact
to the existing portfolio of customer contracts entered into prior to adoption. After completing our review, we will continue
to evaluate the effect of adopting this guidance upon our results of operations, cash flows and financial position.
In
February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
” (“ASU 2016-02”). The standard
requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months.
ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early
adoption is permitted. Accordingly, the standard is effective for us on September 1, 2019 using a modified retrospective approach.
We are currently evaluating the impact that the standard will have on our consolidated condensed financial statements.
There
were other updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations
or cash flows.
NOTE
3 — ACQUISITIONS
Clouding
Corp.
On
August 29, 2014, the Company entered into a patent purchase agreement (the “Clouding Agreement”) between Clouding
Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (“Clouding”) and Clouding IP, LLC, a Delaware
limited liability company (“Clouding IP”), pursuant to which Clouding acquired a portfolio of patents from Clouding
IP. The Clouding Agreement included an earn out payable to Clouding IP, which was booked as an earn out liability on the balance
sheet in accordance with the appraisal of the consideration and intangible value.
The
Clouding IP earn out liability was determined to be a Level 3 liability, which requires assessment of fair value at each period
end by using a discounted cash flow model as the valuation methodology, using unobservable inputs, such as revenue and expenses
forecasts, timing of proceeds, and discount rates. Based on the reassessment of fair value as of September 30, 2017, the Company
determined the Clouding IP earn out liability to be $32,637 (current portion) and $681,175 (long-term portion) and as of December
31, 2016, the Company determined the Clouding IP earn out liability to be $81,930 (current portion) and $1,400,082 (long-term
portion).
Munitech
IP S.a.r.l. (“Munitech”)
On
June 27, 2016, Munitech S.a.r.l. (“Munitech”), a Luxembourg limited liability company and newly formed wholly-owned
subsidiary of the Company, entered into two Patent Purchase Agreements (the “PPA” or together, the “PPAs”)
to purchase 221 patents from Siemens Aktiengesellschaft. The patents purchased by Munitech relate to W-CDMA and GSM cellular technology
and cover all the major global economies including China, France, Germany, the United Kingdom and the United States. Significantly,
many of the patent families have been declared to be Standard Essential Patents (“SEPs”) with the European Telecommunications
Standard Institute (“ETSI”) and/or the Association of Radio Industries and Businesses (“ARIB”) related
to Long Term Evolution (“LTE”), Universal Mobile Telecommunications System (“UMTS”), and/or General Packet
Radio Service (“GPRS”).
Pursuant
to the terms of the PPAs, Munitech (i) paid Siemens Aktiengesellschaft $1,150,000 in cash upon closing and (ii) agreed to two
future payments, one in the amount of $1,000,000 payable on December 31, 2016 and the second in the amount of $750,000 payable
on September 30, 2017.
After
evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing
activity, vendors associated with the patents, any royalties, and any other assets other than the patents.
On
September 1, 2017, the Company entered into a Share Purchase Agreement with GPat Technologies, LLC (“GPat”)
whereby the Company sold its 100% interest in Munitech to GPat.
Magnus
IP GmbH (“Magnus”)
On
July 5, 2016, Marathon IP GmbH (“Marathon IP”), a German corporate entity and newly formed wholly-owned subsidiary
of the Company, entered into a Patent Purchase Agreements (the “PPA”) to purchase 86 patents from Siemens Switzerland
Ltd and Siemens Industry Inc., (together, “Siemens”). On September 15, 2016, the patents were assigned by Marathon
IP to Magnus, both of which are wholly-owned subsidiaries of the Company. The patents purchased by Marathon IP relate to Internet-of-Things
(IOT) technology. Generally, the portfolio’s subject matter is directed toward self-healing control networks for automation
systems. The patents are relevant to wireless mesh or home area networks for use in IOT, or connected home devices and enable
simple commissioning, application level security, simplified bridging, and end-to-end IP security. The technology can support
a wide variety of IOT enabled devices including lighting, sensors, appliances, security, and more. Pursuant to the terms of the
PPA, Marathon IP paid Siemens $250,000 in cash upon closing.
Pursuant
to the terms of the PPAs, Munitech (i) paid Siemens $250,000 in cash upon closing and (ii) will pay a percentage of gross proceeds
in excess of a reserve threshold on behalf of Marathon IP.
After
evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing
activity, vendors associated with the patents, any royalties, and any other assets other than the patents.
On
October 20, 2017, the Company assigned the patents held by Magnus to DBD, pursuant to the First Amendment to Amended and Restated
Revenue Sharing and Securities Purchase Agreement and Restructuring Agreement (the “First Amendment and Restructuring Agreement”)
entered into with DBD. In exchange for the assignment of three of the Company’s portfolios, of which Magnus was one, DBD
cancelled all indebtedness owed by the Company to DBD.
Traverse
Technologies Corp. (“Traverse”)
On
August 3, 2016, Traverse Technologies Corp. (“Traverse”), a United States corporation and newly formed wholly-owned
subsidiary of the Company, entered into a Patent Purchase Agreement (the “PPA”) to purchase 12 patents from CPT IP
Holdings (“CPT”). The patents purchased by Traverse relate to batteries and principally cover various Asian and the
United States markets.
Pursuant
to the terms of the PPAs, Traverse (i) paid CPT $1,300,000 in cash upon closing and (ii) will pay a percentage of net recoveries
in excess of a reserve threshold on behalf of Traverse.
After
evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing
activity, vendors associated with the patents, any royalties, and any other assets other than the patents.
On
October 20, 2017, the Company assigned the patents held by Traverse to DBD, pursuant to the First Amendment and Restructuring
Agreement entered into with DBD. In exchange for the assignment of three of the Company’s portfolios, of which Traverse
was one, DBD cancelled all indebtedness owed by the Company to DBD.
PG
Technologies S.a.r.l. (“PG Tech”)
On
August 11, 2016, PG Technologies S.a.r.l. (“PG Tech”), a Luxembourg limited liability company jointly owned with a
large litigation financing fund, entered into a Patent Funding and Exclusive License Agreement (the “ELA”) to manage
the monetization of greater than 10,000 patents in a single industry vertical with a Fortune 50 company. The patents cover all
the major global economies including China, France, Germany, the United Kingdom and the United States. The Company determined
that its ownership in PG Tech constitutes a VIE and that the Company is the primary beneficiary, as a result of which, the Company
consolidated PG Tech in its financial statements.
Pursuant
to the terms of the ELA, PG Tech agreed with the Fortune 50 company to pay (i) $1,000,000 in cash upon closing, (ii) a future
payment in the amount of $1,000,000 payable on or before December 31, 2016, (iii) minimum quarterly payments of $250,000 starting
on April 1, 2017 and (iv) split 50% of the net licensing revenues.
After
evaluating the facts and circumstances of the purchase, the Company determined that this was an asset purchase. In coming to its
conclusion, the Company reviewed the status of the assets, the historical activity and the absence of any employees, licensing
activity, vendors associated with the patents, any royalties, and any other assets other than the patents.
On
October 27, 2017, the Company entered into an Assignment and Confirmation Agreement (the “Assignment”) with Luxone
Ventures S.a.r.l. (“Luxone”) whereby the Company assigned all of its ownership interest in PG Technologies, S.a.r.l.
(“PG Tech”) to Luxone. Pursuant to the Assignment, Luxone assumed the Company’s ownership interest in PG Tech
and the Company removed from its balance sheet all the liabilities and debt associated with PG Tech and received in return a revenue
share associated with future earnings from the PG Tech portfolio.
NOTE
4 – INTANGIBLE ASSETS
Intangible
assets include patents purchased and patents acquired in lieu of cash in licensing transactions. Patents purchased are recorded
based at their acquisition cost and patents acquired in lieu of cash are recorded at their fair market value. Intangible assets
consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Intangible
Assets
|
|
$
|
20,403,408
|
|
|
$
|
23,637,813
|
|
Accumulated
Amortization & Impairment
|
|
|
(12,813,195
|
)
|
|
|
(11,323,185
|
)
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$
|
7,590,213
|
|
|
$
|
12,314,628
|
|
Intangible
assets are comprised of patents with estimated useful lives between approximately 1 to 16 years. Once placed in service, the Company
will amortize the costs of intangible assets over their estimated useful lives on a straight-line basis. During the three and
nine months ended September 30, 2017, respectively, the Company capitalized a total of $0 and $0 in patent acquisition costs and
during the three and nine months ended September 30, 2016, respectively, the Company capitalized a total of $3,550,000
and $6,450,000 in patent acquisition costs. Costs incurred to acquire patents, including legal costs, are also capitalized
as long-lived assets and amortized on a straight-line basis with the associated patent. Amortization of patents is included as
an operating expense as reflected in the accompanying consolidated condensed statements of operations. The Company assesses fair
market value for any impairment to the carrying values. The Company recorded impairment charges to its intangible assets during
the three and nine months ended September 30, 2017 in the amount of $723,218 and $723,218, respectively, compared to impairment
charges associated with the end of life of a number of the Company’s portfolios during the three and nine months ended September
30, 2016 in the amounts of $5,531,383 and $6,525,273, respectively.
Patent
amortization expense for the three and nine months ended September 30, 2017 was $457,419 and $1,803,264, respectively, and for
the three and nine months ended September 30, 2016, patent amortization expense was $2,030,886 and $6,018,196, respectively. All
patent amortization expense figures are net of foreign currency translation adjustments. Future amortization of intangible assets,
net of foreign currency translation adjustments is as follows:
2017
|
|
$
|
401,804
|
|
2018
|
|
|
1,517,219
|
|
2019
|
|
|
1,447,660
|
|
2020
|
|
|
1,154,767
|
|
2021
|
|
|
1,004,600
|
|
2022
and thereafter
|
|
|
2,064,163
|
|
Total
|
|
$
|
7,590,213
|
|
As
of September 30, 2017, our operating subsidiaries owned 170 patents, as set forth below, and had economic rights to over 10,000
additional patents, both of which include U.S. patents and certain foreign counterparts. In the aggregate, the earliest date for
expiration of a patent in the Company’s patent portfolio has passed (the patent is expired, but patent rules allow for nine-year
look-back for royalties), the median expiration date for patents in the Company’s portfolio is September 13, 2021, and the
latest expiration date for a patent in any of the Company’s patent portfolios is February 27, 2033. A summary of the Company’s
patent portfolios is as follows:
Subsidiary
|
|
Number of
Patents
|
|
|
Earliest
Expiration Date
|
|
|
Median
Expiration Date
|
|
|
Latest
Expiration Date
|
|
|
Subject
Matter
|
Clouding
Corp.
|
|
|
25
|
|
|
|
2/3/18
|
|
|
|
9/10/21
|
|
|
|
5/29/29
|
|
|
Network
and data management
|
CRFD
Research, Inc.
|
|
|
5
|
|
|
|
5/25/21
|
|
|
|
9/17/21
|
|
|
|
8/19/23
|
|
|
Web
page content translator and device-to-device transfer system
|
Dynamic
Advances, LLC
|
|
|
2
|
|
|
|
11/6/21
|
|
|
|
9/7/23
|
|
|
|
7/9/25
|
|
|
Natural
language interface
|
Magnus
IP
|
|
|
55
|
|
|
|
1/28/22
|
|
|
|
9/27/25
|
|
|
|
12/9/31
|
|
|
Network
Management/Connected Home Devices
|
Medtech
Group Acquisition Corp.
|
|
|
45
|
|
|
|
Expired
|
|
|
|
12/8/18
|
|
|
|
8/9/29
|
|
|
Medical
technology
|
Signal
IP, Inc.
|
|
|
2
|
|
|
|
8/28/20
|
|
|
|
8/17/21
|
|
|
|
8/6/22
|
|
|
Automotive
|
Traverse
Technologies
|
|
|
20
|
|
|
|
2/27/22
|
|
|
|
2/25/29
|
|
|
|
2/27/33
|
|
|
Li-Ion
Battery/High Capacity Electrodes
|
Soems
Acquisition
|
|
|
16
|
|
|
|
11/11/17
|
|
|
|
4/6/19
|
|
|
|
7/18/24
|
|
|
N/A
|
|
|
|
|
|
|
|
Median
|
|
|
|
09/13/21
|
|
|
|
|
|
|
|
On
October 20, 2017, the Company assigned the patent held by Dynamic Advances LLC, Magnus IP GmbH and Traverse Technologies Corp.
(all wholly-owned subsidiaries of the Company) to DBD.
On
October 27, 2017, the Company assigned the economic rights to its more than 10,000 patents to Luxone.
NOTE
5 - STOCKHOLDERS’ EQUITY
The
Company has authorized capital to 200,000,000 shares of Common Stock with par value to $0.0001 per share, and has authorized capital
of 50,000,000 shares of preferred stock, par value $0.0001 per share.
On
July 18, 2017, shareholders of record holding a majority of the outstanding voting capital of the Company approved a reverse stock
split of the Company’s issued and outstanding common stock by a ratio of not less than one-for-four and not more than one-for-twenty-five,
with such ratio to be determined by the Board of Directors, in its sole discretion. On October 25, 2017, the reverse stock split
ratio of one (1) for four (4) basis was approved by the Board of Directors. On October 30, 2017, the Company filed a certificate
of amendment to its Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada in order
to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.0001 per share on
a one (1) for four (4) basis.
Series
B Convertible Preferred Stock
The
terms of the Series B Convertible Preferred Stock are summarized below:
Dividend
.
The holders of Series B Convertible Preferred Stock will be entitled to receive such dividends paid and distributions made to
the holders of Common Stock, pro rata to the same extent as if such holders had converted the Series B Convertible Preferred Stock
into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock
on the record date for such dividends and distributions.
Liquidation
Preference
. In the event of a liquidation, dissolution or winding up of the Company, after provision for payment of all debts
and liabilities of the Company, any remaining assets of the Company shall be distributed pro rata to the holders of Common Stock
and the holders of Series B Convertible Preferred Stock as if the Series B Convertible Preferred Stock had been converted into
shares of Common Stock on the date of such liquidation, dissolution or winding up of the Company.
Voting
Rights
. The Series B Convertible Preferred Stock have no voting rights except with regard to certain customary protective
provisions set forth in the Series B Convertible Preferred Stock Certificate of Designations and as otherwise provided by applicable
law.
Conversion
.
Each share of Series B Convertible Preferred Stock may be converted at the holder’s option at any time after issuance into
one share of Common Stock, provided that the number of shares of Common Stock to be issued pursuant to such conversion does not
exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, result in such holder beneficially
owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder)
in excess of 9.99% of all of the Common Stock outstanding at such time, unless otherwise waived in writing by the Company with
ninety-one (61) days’ notice.
Series
D Convertible Preferred Stock
The
Company issued Series D Convertible Preferred Stock in exchange for the outstanding convertible note issued in October 2014 and
prior to September 30, 2017, all of the Series D Convertible Preferred Stock was converted to the Company’s Common Stock
and no shares of the Series D Convertible Preferred Stock remain outstanding. The terms of the Series D Convertible Preferred
Stock are summarized below:
Dividend
.
The holders of Series D Convertible Preferred Stock will be entitled to receive such dividends paid and distributions made to
the holders of Common Stock, pro rata to the same extent as if such holders had converted the Series D Convertible Preferred Stock
into Common Stock (without regard to any limitations on conversion herein or elsewhere) and had held such shares of Common Stock
on the record date for such dividends and distributions.
Liquidation
Preference
. In the event of a liquidation, dissolution or winding up of the Company, after provision for payment of all debts
and liabilities of the Company, any remaining assets of the Company shall be distributed pro rata to the holders of Series B Convertible
Preferred Stock and Series D Convertible Preferred Stock as if the Series B Convertible Preferred Stock and Series D Convertible
Preferred Stock had been converted into shares of Common Stock on the date of such liquidation, dissolution or winding up of the
Company, prior to any distributions to Junior Stock, which includes the Company’s Common Stock.
Voting
Rights
. Except as otherwise expressly required by law, each holder of Preferred Shares shall be entitled to vote on all matters
submitted to shareholders of the Company and shall be entitled to the number of votes for each Preferred Share owned at the record
date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date
such vote is taken or any written consent of shareholders is solicited, equal to the number of shares of Common Stock such Preferred
Shares are convertible into (voting as a class with Common Stock),
Conversion
.
Each share of Series D Convertible Preferred Stock may be converted at the holder’s option at any time after issuance into
five shares of Common Stock, provided that the number of shares of Common Stock to be issued pursuant to such conversion does
not exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, result in such holder beneficially
owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder)
in excess of 9.99% of all of the Common Stock outstanding at such time, unless otherwise waived in writing by the Company with
ninety-one (61) days’ notice.
Common
Stock
On
May 11, 2016, the Company entered into a consulting agreement with the Cooper Law Firm, LLC (“Cooper”), pursuant to
which the Company agreed to issue 20,000 shares of the Company’s Common Stock. In connection with this transaction, the
Company valued the shares at the quoted market price on the date of grant at $6.80 per share or $136,000.
On
December 9, 2016, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain
institutional investors for the sale of an aggregate of 870,500 shares of the Company’s common stock, at a purchase price
of $6.00 per share, and warrants to purchase 435,249 shares of common stock for a purchase price of $0.01 per warrant, or $17,019.95
in total. None of the warrants were purchased prior to December 31, 2016, and all were subsequently purchased prior to the date
of this report.
On
February 1, 2017, the Company issued 187,500 shares of common stock pursuant to an At-The-Market (“ATM”) securities
offering with certain institutional investors at an average price of $6.96 per share, yielding gross proceeds of $1,301,923.
On
April 12, 2017, pursuant to an amendment entered into on March 6, 2017 to the settlement agreement entered into on October 29,
2015 between the Company and Dominion Harbor, the Company issued 31,250 shares of common stock to Dominion Harbor. In connection
with this transaction, the Company valued the shares at the quoted market price on the date of grant at $0.83 per share or $103,750.
On
April 18, 2017, the Company entered into a securities purchase agreement (the “April Purchase Agreement”) with certain
institutional investors for the sale of an aggregate of 950,000 shares of the Company’s common stock at a purchase price
of $2.80per share and warrants to purchase 570,000 shares of common stock at a purchase price of $3.32 per share.
On
April 24, 2017, the Company issued one of its vendors 7,500 shares of Common Stock in exchange for cancellation of the vendor’s
outstanding invoices. In connection with this transaction, the Company valued the shares at the quoted market price on the date
of grant at $3.32 per share or $24,897.
On
August 9, 2017, the Company issued 250,000 shares of the Company’s Common Stock pursuant to the conversion of 200,000 shares
of Series D Convertible Preferred Stock.
On
August 29, 2017, the Company issued 200,000 shares in total of the Company’s Common Stock to four different vendors in partial
or total payment of outstanding invoices.
On
September 5, 2017, the Company issued 62,500 shares of the Company’s Common Stock pursuant to the conversion of 50,000
shares of Series D Convertible Preferred Stock.
On
September 6, 2017, the Company issued 534,710 shares of the Company’s Common Stock pursuant to the conversion of $427,768
in principal amount invested in the Convertible Note.
On
September 13, 2017, the Company issued 315,925 shares of the Company’s Common Stock pursuant to the conversion of 252,750
shares of Series D Convertible Preferred Stock.
On
September 29, 2017, the Company issued 598,500 shares of the Company’s Common Stock to holders of the warrants issued
pursuant to the April Purchase Agreement following approval by the Company’s shareholders of the warrant exchange at a special
meeting held on September 29, 2017.
Common
Stock Warrants
Pursuant
to the sales of securities underlying the Purchase Agreement entered into on December 9, 2016, the Company issued a warrant to
the underwriter (“Underwriter’s Warrant”) to purchase 43,525 shares of Common Stock on December 9, 2016. The
Underwriter’s Warrant has an exercise price of $6.92 per share. In addition, in a series of issuances in January 2017, the
Company issued warrants to the investors (“Investor Warrants”) pursuant to the Purchase Agreement to purchase 435,249
shares of the Company’s Common Stock. The Investor Warrants have an exercise price of $6.80 per share. The warrants were
issued in a series of transaction during January 2017 and were valued based on the Black-Scholes model, using the strike price
of $6.80 per share, market prices ranging from $7.00 to $8.52 per share, an expected term of 3.25 years, volatility ranging from
38% to 39%, based on the average volatility of comparable companies over the comparable prior period, and a discount rate as published
by the Federal Reserve ranging from 1.50% to 1.56%. The Company reviewed the issuance of the Underwriter and Investor Warrants
and determined that pursuant to ASC 480 and ASC 815, the Underwriter and Investor Warrants should be classified as a liability
and marked to market every reporting period. Following acceptance by the SEC of the Company’s registration statement registering
these warrants, the warrants were reclassified from a liability to equity.
On
January 10, 2017, pursuant to the amendment to the Fortress debt, the Company issued a five-year warrant to DBD to purchase 46,875
shares of the Company’s Common Stock, exercisable at $6.80 per share, subject to adjustment. The warrant was valued based
on the Black-Scholes model, using the strike and market prices of $6.80 and $7.60 per share, respectively, an expected term of
3.00 years, volatility of 39% based on the average volatility of comparable companies over the comparable prior period and a discount
rate as published by the Federal Reserve of 1.52%. The Company reviewed the issuance of the Underwriter and Investor Warrants
and determined that pursuant to ASC 480 and ASC 815, the Underwriter and Investor Warrants met the requirement to be classified
as equity and were booked as Additional Paid-in Capital.
Pursuant
to the sales of securities underlying the April Purchase Agreement entered into on April 18, 2017, the Company issued a warrant
to the underwriter (“Underwriter’s Warrant”) to purchase 14,250 shares of Common Stock. The Underwriter’s
Warrant has an exercise price of $3.08 per share. In addition, also associated with the April Purchase Agreement, the Company
issued warrants to the investors (“April Investor Warrants”) pursuant to the Purchase Agreement to purchase 570,000
shares of the Company’s Common Stock. The Investor Warrants have an exercise price of $3.32 per share. The Investor Warrants
were valued based on the Black-Scholes model, using the strike price of $3.08 per share, an expected term of 2.5 years, volatility
of 39%, based on the average volatility of comparable companies over the comparable prior period and a discount rate as published
by the Federal Reserve of 1.60%. The Underwriter’s Warrant was valued based on the Black-Scholes model, using the strike
price of $3.32 per share, an expected term of 3.25 years, volatility of 38%, based on the average volatility of comparable
companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.72%. The Company reviewed
the issuance of the Underwriter and Investor Warrants and determined that pursuant to ASC 480 and ASC 815, the Underwriter and
Investor Warrants should be classified as equity.
Pursuant
to the Unit Purchase Agreement entered into on August 14, 2017, the Company, in two closings, issued warrants to the investors
(“Note Investor Warrants”) to purchase 6,875,000 shares of the Company’s Common Stock. The Note Investor Warrants
have an exercise price of $1.20 per share. The Note Investor Warrants from the first close were valued based on a Monte Carlo
simulation model, using the strike price of $1.20 per share, remaining term of 5.50 years, volatility of 100%, based on the terms
of the Unit Purchase Agreement which set the volatility at the greater 100% or the 100-day volatility immediately following certain
events and a discount rate as published by the Federal Reserve of 1.76%. The Note Investor Warrants from the second close were
valued based on a Monte Carlo simulation model, using the strike price of $1.20 per share, remaining term of 5.50 years, volatility
of 100%, based on the methodology set forth above and a discount rate as published by the Federal Reserve of 1.98%. The Company
reviewed the issuance of the Note Investor Warrants and determined that pursuant to ASC 480 and ASC 815, the Note Investor Warrants
should be classified as a liability.
At
September 30, 2017, the Company had warrants outstanding to purchase 7,487,894 shares of Common Stock with a weighted average
remaining life of 5.35 years. A summary of the status of the Company’s outstanding stock warrants and changes during the
period then ended is as follows:
|
|
Number
of
Warrants
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
Balance
at December 31, 2016
|
|
|
116,520
|
|
|
$
|
15.17
|
|
|
|
3.25
|
|
Granted
|
|
|
7,941,374
|
|
|
|
1
.70
|
|
|
|
5.01
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
570,000
|
|
|
|
3.32
|
|
|
|
-
|
|
Balance
at September 30, 2017
|
|
|
7,487,894
|
|
|
$
|
1.86
|
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercisable at September 30, 2017
|
|
|
612,894
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of warrants granted during the period
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
Warrant
Amendment Letter
On
March 11, 2016, the Company entered into an agreement with the remaining investor in the Company’s convertible debt issued
on October 9, 2014 to revise the strike price of their warrant, which could be exercised for the purchase of 5,834 shares of Common
Stock, in exchange for permanent waiver of certain consent rights held by the holder of the convertible debt. As a result of the
amendment, the strike price was reduced from $16.50 to the lower of 1) $8.00 per share or 2) the same gross per share price as
the Company sells shares of its Common Stock in any future public offering of the Company’s Common Stock.
Common
Stock Options
On
May 10, 2016, the Company entered into an executive employment agreement with Erich Spangenberg (“Spangenberg Agreement”)
pursuant to which Mr. Spangenberg would serve as the Company’s Director of Acquisitions, Licensing and Strategy. As part
of the consideration, the Company agreed to grant Mr. Spangenberg a ten-year stock option to purchase an aggregate of 125,000
shares of Common Stock, with a strike price of $7.48 per share, vesting in twenty-four (24) equal installments on each monthly
anniversary of the date of the Spangenberg Agreement. The options were valued based on the Black-Scholes model, using the strike
and market prices of $7.48 per share, an expected term of 5.75 years, volatility of 47% based on the average volatility of comparable
companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.32%.
On
May 20, 2016, the Company entered into an employment agreement with Kathy Grubbs (“Grubbs Agreement”) pursuant to
which Ms. Grubbs would serve as an analyst. As part of the consideration, the Company agreed to grant Ms. Grubbs a ten-year stock
option to purchase an aggregate of 12,500 shares of Common Stock, with a strike price of $9.00 per share, vesting in thirty-nine
(36) equal installments on each monthly anniversary of the date of the Grubbs Agreement. The options were valued based on the
Black-Scholes model, using the strike and market prices of $9.00 per share, an expected term of 6.50 years, volatility of 47%
based on the average volatility of comparable companies over the comparable prior period and a discount rate as published by the
Federal Reserve of 1.88%.
On
July 1, 2016, in conjunction with an executive employment agreement with David Liu (“Liu Agreement”) pursuant to which
Mr. Liu would serve as the Company’s CTO, entered into on June 29, 2016, the Company granted Mr. Liu a ten-year stock option
to purchase an aggregate of 37,500 shares of Common Stock, with a strike price of $11.16 per share, vesting in thirty-nine (36)
equal installments on each monthly anniversary of the date of the Liu Agreement. The options were valued based on the Black-Scholes
model, using the strike and market prices of $11.16 per share, an expected term of 6.50 years, volatility of 47% based on the
average volatility of comparable companies over the comparable prior period and a discount rate as published by the Federal Reserve
of 1.20%.
On
October 13, 2016, the Company issued its independent board members ten-year options to purchase an aggregate of 20,000 shares
of the Company’s Common Stock with an exercise price of $9.64 per share, subject to adjustment, which shall vest monthly
over twelve (12) months commencing on the date of grant. The options were valued based on the Black-Scholes model, using the strike
and market prices of $9.64 per share, an expected term of 5.5 years, volatility of 46% based on the average volatility of comparable
companies over the comparable prior period and a discount rate as published by the Federal Reserve of 1.21%. As there were not
sufficient shares in the Company’s equity incentive plans to accommodate these grants, Mr. Croxall forfeited a portion of
one of his options to purchase 20,000 shares.
At
September 30, 2017, there was a total of $7,072 of unrecognized compensation expenses related to non-rested option-based compensation
arrangements entered into during the year.
A
summary of the stock options as of September 30, 2017 and changes during the period are presented below:
|
|
Number
of
Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
Balance
at December 31, 2016
|
|
|
879,034
|
|
|
$
|
17.84
|
|
|
|
6.80
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
48,542
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
217,298
|
|
|
|
16.71
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at September 30, 2017
|
|
|
613,194
|
|
|
$
|
17.04
|
|
|
|
3.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable at September 30, 2017
|
|
|
591,841
|
|
|
$
|
13.83
|
|
|
|
2.91
|
|
Options
expected to vest
|
|
|
21,354
|
|
|
$
|
20.33
|
|
|
|
7.23
|
|
Weighted
average fair value of options granted during the period
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
NOTE
6 – DEBT, COMMITMENTS AND CONTINGENCIES
Debt
consists of the following:
|
|
Maturity
|
|
Interest
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
Date
|
|
Rate
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured term notes
|
|
9-Jul-20
|
|
|
LIBOR
+ 9.75
|
%
|
|
$
|
15,881,493
|
|
|
$
|
15,620,759
|
|
Less:
debt discount
|
|
|
|
|
|
|
|
|
(1,686,090
|
)
|
|
|
(1,425,167
|
)
|
Total
senior-term notes, net of discount
|
|
|
|
|
|
|
|
$
|
14,195,403
|
|
|
$
|
14,195,592
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Note
|
|
10-Oct-18
|
|
|
11
|
%
|
|
$
|
0
|
|
|
$
|
500,000
|
|
|
|
Maturity
|
|
|
Late
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Fee
|
|
|
|
2017
|
|
|
|
2016
|
|
iRunway
trade payable
|
|
On
Demand
|
|
|
1.5%
per month
|
|
|
$
|
0
|
|
|
$
|
191,697
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
Note
payable
|
|
31-Jan-17
|
|
|
NA
|
|
|
$
|
-
|
|
|
$
|
103,000
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
Siemens
|
|
30-Sep-17
|
|
|
NA
|
|
|
$
|
-
|
|
|
$
|
1,672,924
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
Dominion
Harbor
|
|
15-Oct-17
|
|
|
NA
|
|
|
$
|
-
|
|
|
$
|
125,000
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
Oil
& Gas
|
|
On
Demand
|
|
|
NA
|
|
|
$
|
1,000,000
|
|
|
$
|
944,296
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
Convertible
Note
|
|
10-May-18
|
|
|
0
|
|
|
$
|
1,876,300
|
|
|
$
|
-
|
|
Less:
debt discount
|
|
|
|
|
|
|
|
|
(1,851,171
|
)
|
|
|
-
|
|
Total
Convertible notes, net of discount
|
|
|
|
|
|
|
|
$
|
25,129
|
|
|
$
|
-
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
Convertible
Note
|
|
31-May-18
|
|
|
5
|
%
|
|
$
|
3,195,932
|
|
|
$
|
-
|
|
Less:
debt discount
|
|
|
|
|
|
|
|
|
(2,834,308
|
)
|
|
|
-
|
|
Total
Convertible notes, net of discount
|
|
|
|
|
|
|
|
$
|
361,624
|
|
|
$
|
-
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
Medtech
Note
|
|
1-May-18
|
|
|
NA
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
September
30,
|
|
|
|
December
31,
|
|
|
|
Date
|
|
|
Rate
|
|
|
|
2017
|
|
|
|
2016
|
|
3D
Nano license Fee
|
|
31-Jan-17
|
|
|
NA
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Total
|
|
$
|
15,582,156
|
|
|
$
|
17,832,509
|
|
Less: current
portion
|
|
|
(15,582,156
|
)
|
|
|
(13,162,007
|
)
|
Total, net of
current portion
|
|
$
|
-
|
|
|
$
|
4,670,502
|
|
Senior
Secured Term Notes
On
January 29, 2015, the Company and certain of its subsidiaries entered into a series of Agreements including a Securities Purchase
Agreement with DBD Credit Funding LLC, (“DBD”) an affiliate of Fortress Credit Corp., under which the terms of the
notes were:
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(i)
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$15,000,000
original principal amount of Fortress Notes (the “Initial Note”);
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(ii)
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a
right to receive a portion of certain proceeds from monetization net revenues received by the Company (the “Revenue
Stream”, after receipt by the Company of $15,000,000 of monetization net revenues and repayment of the Fortress Notes);
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(iii)
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a
five-year Fortress Warrant to purchase 25,000 shares of the Company’s Common Stock exercisable at $29.76 per share,
subject to adjustment; and
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(iv)
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33,603
shares of the Issuer’s Common Stock (the “Fortress Shares”).
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On
February 12, 2015, the Company issued an additional $5,000,000 of Notes (which increase proportionately the Revenue Stream).
The
Initial Note matures on July 29, 2018. Additional Notes issued pursuant to the Fortress Purchase Agreement mature 42 months after
issuance. The unpaid principal amount of the Initial Note plus the additional $5,000,000 note (including any PIK Interest, as
defined below) bear cash interest at a rate equal to LIBOR plus 9.75% per annum payable on the last business day of each month.
Interest is paid in cash except that 2.75% per annum of the interest due on each Interest Payment Date shall be paid-in-kind,
by increasing the principal amount of the Notes by the amount of such interest. Monthly principal payments are due commencing
one year after the anniversary dates of the loans.
The
terms of the Fortress Warrant provide that until January 29, 2020, the Warrant may be exercised for cash or on a cashless basis.
Exercisability of the Fortress Warrant is limited if, upon exercise, the holder would beneficially own more than 4.99% of the
Company’s Common Stock. The exercise price of the warrant is $29.76 and the warrant fair value was determined to be $318,679
utilizing the Black-Scholes model, with the fair value of the warrants recorded as additional paid-in capital and reducing the
carrying value of the Notes. As of September 30, 2017 and December 31, 2016, the unamortized discount on the Notes was $1,686,090
and $1,425,167, respectively.
Senior
Secured Term Note Amendment
On
January 10, 2017 the Company and certain of its subsidiaries entered into the Amended and Restated Revenue Sharing and Securities
Purchase Agreement (“ARRSSPA”) with DBD Credit Funding LLC, under which the Company and DBD amended and restated the
Revenue Sharing and Securities Purchase Agreement dated January 29, 2015 (the “Original Agreement”) pursuant to which
(i) Fortress purchased $20,000,000 in promissory notes, of which $15,881,493 is outstanding as of September 30, 2017, (ii) an
interest in the Company’s revenues from certain activities and warrants to purchase 25,000 shares of the Company’s
common stock. The ARRSSPA amends and restates the Original Agreement to provide for (i) the sale by the Company of a $4,500,000
promissory note (the “New Note”) and (ii) the insurance of additional warrants to purchase 46,875 shares of common
stock (the “New Warrant”). Pursuant to the ARRSSPA, Fortress acquired an increased revenue stream right to certain
revenues generated by the Company through monetization of our patent portfolio (“Monetization Revenues”). The ARRSSPA
increases the revenue stream basis to $1,225,000. The ARRSSPA provides for the potential issuance of up to $7,500,000 of additional
notes (the “Additional Notes”), of which not more than $3,750,000 shall be made prior to June 30, 2017 and of which
not more than $3,750,000 shall be made available during the period following June 30, 2017 and on or prior to December 31, 2017
and not more than two such issuances shall occur under the ARRSSPA.
The
unpaid principal amount of the New Note (including any PIK Interest, as defined below) shall bear cash interest at a rate equal
to LIBOR plus 9.75% per annum; provided that upon and during the continuance of an Event of Default (as defined in the Initial
Note), the interest rate shall increase by an additional 2% per annum.
Interest
on the Initial Note shall be paid on the last business day of each calendar month (the “Interest Payment Date”), commencing
January 31, 2017. Interest shall be paid in cash except that 2.75% per annum of the interest due on each Interest Payment Date
shall be paid-in-kind, by increasing the principal amount of the Notes by the amount of such interest, effective as of the applicable
Interest Payment Date (“PIK Interest”). PIK Interest shall be treated as added principal of the New Note for all purposes,
including interest accrual and the calculation of any prepayment premium. The Company paid a structuring fee of 2.0% of the New
Note and would pay a 2.0% fee upon the issuance of any Additional Notes. The proceeds of the New Note and any Additional Notes
may be used for working capital purposes, portfolio acquisitions, growth capital and other general corporate purposes.
The
ARRSSPA contains certain customary events of default, and also contains certain covenants including a requirement that the Company
maintain minimum liquidity of $1,250,000 in unrestricted cash and cash equivalents.
The
terms of the New Warrants provide that from July 10, 2017 until January 10, 2022, the Warrant may be exercised for cash or on
a cashless basis. Exercisability of the Warrant is limited if, upon exercise, the holder would beneficially own more than 4.99%
of the Issuer’s Common Stock.
Pursuant
to the ARSSPA, as security for the payment and performance in full of the Secured Obligations (as defined in the Security Agreement
entered in favor of the Note purchasers (the “Security Agreement”) the Company and certain subsidiaries executed and
delivered in favor of the purchasers a Security Agreement and a Patent Security Agreement, including a pledge of the Company’s
interests in certain of its subsidiaries. As further set forth in the Security Agreement, repayment of the Note Obligations (as
defined in the Notes) is secured by a first priority lien and security interest in all the assets of the Company, subject to certain
permitted liens. Certain subsidiaries of the Company also executed guarantees in favor of the purchasers (each, a “Guaranty”),
guaranteeing the Note Obligations.
Amendment
to Senior Secured Term Note Amendment
On
August 3, 2017, the Company and certain of its operating subsidiaries entered into a First Amendment to Amended and Restated Revenue
Sharing and Securities Purchase Agreement and Restructuring Agreement (the “First Amendment and Restructuring Agreement”)
with DBD to cancel the indebtedness and other obligations of the Company under that certain ARRSSPA, dated January 10, 2017, which
was originally entered into by the Company and DBD on January 29, 2015.
Pursuant
to the First Amendment and Restructuring Agreement, certain intellectual property owned by the Company (the “Designated
IP”) is to be assigned to one or more newly created special purpose entities (the “SPE”) as elected by DBD,
which to be formed SPE shall be under the management and control of an affiliate of DBD (the “IP Monetization Manager”).
All intellectual property owned by the Company that will not be assigned to one or more newly created special purpose entities
shall be referred to as “Non- Designated IP.” The patents that are part of the Designated IP are referred to as the
“Designated Patents”. Until shareholder approval and the close of the First Amendment and Restructuring Agreement
(the “Restructuring”), all Monetization Revenues arising from the Designated IP and Non-Designated IP shall be paid
to an account that is under the sole and exclusive control of the Collateral Agent as the IP Monetization Manager. In addition,
until the Restructuring, the Company shall be responsible for the expenses associated with the maintenance, prosecution and enforcement
of all of the Company’s intellectual property including the Designated IP and the other IP owned by the Company which is
not to be transferred to the SPE, and for any expenses associated with the pursuit of monetization activities relating to both
the Designated IP and the Non-Designated IP. From and after the Restructuring, the SPE shall have sole responsibility for the
expenses associated with the Designated IP and the Company shall have sole responsibility for the expenses associated with the
Non-Designated IP.
On
October 20, 2017, the Company and DBD satisfied all the closing conditions related to the First Amendment and Restructuring Agreement.
With the close of the First Amendment and Restructuring Agreement, the Company exchanged the patent portfolios held by Dynamic
Advances LLC, Magnus IP GmbH and Traverse Technologies Corp. (all wholly-owned subsidiaries of the Company) in exchange for the
cancelation of all indebtedness and obligations to DBD.
As
of September 30, 2017 and December 31, 2016, the outstanding balances were $15,881,493 and $15,620,759, respectively.
Convertible
Note
In
two transactions, on October 9, 2014 and October 16, 2014, the Company sold an aggregate $5,550,000 of principal amount of convertible
notes (“Convertible Notes”) along with two-year warrants to purchase 32,375 shares of the Company’s Common Stock.
The Convertible Notes are convertible into shares of the Company’s Common Stock at $30.00 per share and the Warrants have
an exercise price of $33.00 per share. The Notes mature on October 10, 2018 and bear interest at the rate of 11% per annum, payable
quarterly in cash on each of the three, nine, nine and twelve-month anniversaries of the issuance date and on each conversion
date. The Notes may become secured by a security interest granted to the holder in certain future assets under certain circumstances.
In the event the Company’s Common Stock trades at a price of at least $108.00 per share for four out of eight trading days,
the Notes will be mandatorily converted into Common Stock of the Company at the then applicable conversion price per share. The
Company repaid the Convertible Notes for all but one holder in early 2015, and exchanged the remaining balance for Series D Convertible
Preferred Stock on August 7, 2017, with the Series D Convertible Preferred Stock converted in its entirety prior to September
30, 2017. The balance was $0 and $500,000 as of September 30, 2017 and December 31, 2016, respectively.
iRunway
The
Company converted a set of outstanding invoices related to work performed by one of the Company’s vendors to a short-term
payable whereby the Company agreed to pay iRunway over time for the open invoices, subject to a payment schedule as defined. To
the extent that the Company does not make payments according to that schedule, the remaining balance accrues interest at 1.5%
per month. On August 20, 2017, the Company entered into a release agreement with iRunway pursuant to which the Company made an
immediate cash payment to iRunway in return for a release of the remaining amount outstanding. As of September 30, 2017 and December
31, 2016, the principal balance was $0 and $191,697, respectively.
Note
Payable
The
Company entered into a short-term advance with an officer related to funds the Company was transferring from its European subsidiaries.
The advance carried no interest and as of September 30, 2017 and December 31, 2016, the outstanding balance was $0 and $103,000,
respectively.
Siemens
Purchase Payment
The
Company entered into a purchase agreement to acquire ownership of certain patents. As part of the purchase agreement, the Company
agreed to certain future payments of cash consideration. The payment obligation bears no interest. On September 1, 2017, the Company
entered into Share Purchase Agreement with GPat whereby the Company sold its 100% interest in Munitech, the wholly-owned subsidiary
holding these patents, to GPat. As of September 30, 2017 and December 31, 2016, the outstanding balances were $0 and $1,672,924,
respectively.
Dominion
Harbor Settlement Note
The
Company entered into a settlement agreement with Dominion Harbor, a former licensing agent for some of the Company’s subsidiaries,
on October 29, 2015 whereby the Company agreed to issue 75,000 shares of the Company’s Common Stock to Dominion Harbor and
make eight (8) payments of $25,000 each ending on October 15, 2017. The shares issued to Dominion Harbor were valued at the quoted
market price on the date of the grant of $6.84 per share or $513,000. As of September 30, 2017 and December 31, 2016, $0 and $125,000,
respectively, remained outstanding, following an agreement between the Company and Dominion wherein the Company paid $25,000 and
issued 31,250 shares of Common Stock to Dominion in full resolution of the outstanding obligation.
Oil
& Gas Purchase Payment
The
Company entered into a purchase agreement to acquire monetization rights to certain patents. As part of the purchase agreement,
the Company agreed to certain future payments of cash consideration. The payment obligation bears no interest and as of September
30, 2017 and December 31, 2016, the Company had an outstanding obligation for purchase of certain Siemens patents in the amount
of $1,000,000 and $944,296, respectively, with such payments expected to be made by December 31, 2017.
Convertible
Note
On
August 14, 2017, the Company entered into a unit purchase agreement (the “Unit Purchase Agreement”) with certain accredited
investors providing for the sale of up to $5,500,000 of 5% secured convertible promissory notes (the “Convertible Notes”),
which are convertible into shares of the Corporation’s common stock, and the issuance of warrants to purchase 6,875,000
shares of the Company’s Common Stock (the “Warrants”). The Convertible Notes are convertible into shares of
the Company’s Common Stock at the lesser of (i) $0.80 per share or (ii) the closing bid price of the Company’s common
stock on the day prior to conversion of the Convertible Note; provided that such conversion price may not be less than $0.40 per
share. The Warrants have an exercise price of $1.20 per share. The Convertible Notes mature on May 31, 2018 and bear interest
at the rate of 5% per annum. In two closings of the Unit Purchase Agreement, the Company issued all $5,500,000 in Convertible
Notes to the investors. As of September 30, 2017, the Company had an outstanding obligation pursuant to the Convertible Notes
in the amount of $5,072,232.
3D
Nano Purchase Payment
3D
Nano entered into a license and purchase agreement with HP Inc. (“HP”) to acquire the rights to use if 3D Nano chooses,
the right to exercise an option to acquire, ownership of certain patents, trade secrets and other intellectual property (the “Technology”).
As part of the purchase agreement, the Company agreed to license the Technology for two payments of $100,000 each, with the first
payment made in April 2016 and the second payment due by January 31, 2017. Under the original agreement, the payment obligations
bear no interest and as of September 30, 2017 and December 31, 2016, 3D Nano had an outstanding obligation in the amount of $0
and $100,000, respectively. On May 1, 2017, 3D Nano entered into an amendment with HP whereby the agreement was extended for two
years. While 3D Nano does not have the obligation under the amendment to make additional payments, should 3D Nano desire to do
so, payments in the amount of $100,000 in each of 2018 and 2019 would be due to HP for the agreement to remain in effect.
Medtech
Note
On
May 31, 2017, the Company entered into a note payable with Medtronic, Inc. (“Medtronic”), the original owner of the
patents in the Company’s Medtech portfolio, whereby the Company agreed to pay Medtronic a total of $750,000 in ten equal
monthly installments for patent enforcement related expenses incurred by Medtronic. Following two payments of $75,000 each in
May and June 2017, the Company entered into an agreement on August 29, 2017 to pay a discounted amount in return for a full release
from the remaining obligations. The note payable carries no interest and since the note payable arose after December 31, 2016
and was repaid in full prior to September 30, 2016, as of September 30, 2017 and December 31, 2016, the outstanding balance, was
$0 and $0, respectively.
Total
Future Minimum Principal Payments
Future
minimum principal payments for all items set forth above are as follows:
2017
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$
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16,881,493
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2018
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5,072,232
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Total
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$
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21,953,725
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Office
Lease
In
October 2013, the Company entered into a net-lease for its current office space in Los Angeles, California. The lease will commence
on May 1, 2014 and runs for seven years through April 30, 2021, with monthly lease payment escalating each year of the lease.
In addition, to paying a deposit of $7,564 and the monthly base lease cost, the Company is required to pay pro rata share of operating
expenses and real estate taxes. Under the terms of the lease, the Company will not be required to pay rent for the first five
months but must remain in compliance with the terms of the lease to continue to maintain that benefit. In addition, the Company
has a one-time option to terminate the lease in the 42th month of the lease. Minimum future lease payments under this lease at
September 30, 2017, for the next five years are as follows:
2017
(Three Months)
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$
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18,081
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2018
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74,540
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2019
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77,872
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2020
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81,336
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2021
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27,504
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Total
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$
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297,333
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NOTE
7 – SUBSEQUENT EVENTS
On
October 20, 2017, the Company and DBD satisfied all the closing conditions related to the First Amendment and Restructuring Agreement.
With the close of the First Amendment and Restructuring Agreement, the Company exchanged the patent portfolios held by Dynamic
Advances LLC, Magnus IP GmbH and Traverse Technologies Corp. (all wholly-owned subsidiaries of the Company) in exchange for the
cancelation of all indebtedness and obligations to DBD.
On
October 27, 2017, the Company entered into the Assignment with Luxone whereby the Company assigned all of its ownership interest
in PG Tech to Luxone. Pursuant to the Assignment, Luxone assumed the Company’s ownership interest in PG Tech and the Company
removed from its balance sheet all the liabilities and debt associated with PG Tech and received in return a revenue share associated
with future earnings from the PG Tech portfolio. Luxone is owner or controlled by a former affiliate of the Company.
On
November 1, 2017, the Company entered into an agreement to acquire, through its wholly-owned subsidiary, Global Bit Ventures Acquisition
Corp., a Nevada corporation (“GBVAC”), 100% of the Capital Stock of Global Bit Ventures, Inc., a Nevada corporation
(“GBV”), which currently secures and powers digital asset blockchains by running specialized servers. Under the terms
of the Agreement and Plan of Merger (the “Merger Agreement”), the Company will issue 126,674,557 shares of
the Company’s Common Stock in exchange for one-hundred (100%) percent of the shares of GBV’s capital stock. At the
closing of the merger, GBVAC shall be merged with and into GBV pursuant to the Merger Agreement and the separate existence of
GBVAC shall cease and GBV shall be the surviving company. The closing of the acquisition is subject to certain closing conditions
including approval of the Merger Agreement by the Company’s Shareholders.